Brattle Experts Outline a Regulatory Framework to Manage Wildfire Financial Risks for Utilities in New Whitepaper
Regulated investor-owned utilities (IOUs) are facing increased threats to their operations and financial resiliency due to extreme weather events that have increased third-party damage claims and prudence challenges. The recent catastrophic wildfires affecting Los Angeles and its surrounding areas, which resulted in a $10 billion loss in the market value of Edison International, are just the latest example of this trend.
In a new whitepaper, “Wildfire Financial Risks for Utilities: Proactive Management, Regulatory Policy and Strategy Recommendations,” Brattle experts offer insights into the current landscape of wildfire liability and its impacts on IOUs, particularly in light of current climate conditions and evolving legal and regulatory standards. The authors review and evaluate the range and complexity of structures governing the allocation of wildfire costs and risks, and argue that fire management difficulties and the potential resulting liabilities should be understood as a problem of cost of service that can be reduced but not eliminated, rather than as a financial risk factor affecting the cost of capital.
Drawing from their experience in recent wildfire regulatory proceedings and the resulting precedents, the authors identify best practices and outline an integrated business strategy/regulatory policy that manages risk equitably. Specifically, they recommend that IOUs, regulators, and stakeholders jointly develop programs that integrate and balance actuarial analysis, wildfire mitigation, Value at Risk (VaR), loss protection design, loss protection access and funding, and optimization of loss protection. Each of these elements is discussed in detail in the whitepaper.
The whitepaper was authored by Brattle Principals Frank C. Graves, Robert S. Mudge, Metin Celebi, Jake Zahniser-Word, and former Research Associate Sam W. Willett. The full paper is available below.
